Last week, Krugman posted a great graph showing how wages stopped tracking productivity around 1970. That is, productivity has increased 150% since then, and median wages, adjusted for inflation, have increased approximately zip (13% or so, mostly in the late 1990's).

Wonky note: Richard Bruce in comment #1 claims to see the flaw, the use of GDP deflator vs CPI as inflation adjustments. However, what his seemingly wonky and authoritative comment seems to get wrong is that the CPI does indeed take "quality" into account (for example, new cars are much better now than they were in 1970, computers get faster ever year), there's a special econometric cottage industry devoted to determining this factor (which has a fancy name: hedonic regression). Cynics might love that this factor does indeed reduce the reported CPI to a small degree, which is probably why expensive experts are paid to calculate it. So you aren't getting more for your stagnated dollars just because some things are getting better while they increase in price--precisely because that change in quality has already been accounted for in calculating your inflation adjusted dollars. Meanwhile, some things decline in quality also, and one can only hope that's been accounted for properly by the hedonic experts who are supposed to be taking everything into account. BTW, this meme that Richard Bruce is presenting has been made by conservatives for a long long time, which is why I already knew the answer from reading a book by Doug Henwood ("After the New Economy"). It's similar to the old remark "you have (cars,refrigerators,tvs,ipods) now so why aren't you happy?"

Krugman merely notes that if you think he's overlooked something, you might be correct, but chances are that you are not, he's been working with these numbers for a long time.

Here's a link wrt hedonic regression (in case you think I just made this up):

Wednesday, July 18, 2012

Brad DeLong expresses his feeling about how deeply wrong wrong wrong Austrian economics is. I am in complete agreement with that feeling. He describes his rebuttal in terms of a present need for safe and liquid assets, hence what we need is continuing monetary expansion. That's not exactly my story, I side with those (like Stiglitz) that believe that monetary expansion at this point can't do much, and what is needed is increased government spending. Yes, spending, because one person's income (and job) is another person's spending. More money can just be hoarded. And beyond even that, what I call for is a vision, and I have such a vision, a vision of a renewable energy and sustainable transportation, a vision which requires public planning and direct investment on scale hitherto unimagined except in the case of World War II. I believe that there is no alternative to having government lead the way on the transition needed with planning and direct investment.

But none of us (I'm including DeLong, Krugman, Stiglitz, and others in this us, though we may disagree on other things) believes that progress can be made as long as world governance remains unable to respond to the current unemployment crisis in a positive manner.

And one of the main things that precludes such positive action are the ideas of dead economists, and in particular the dead economists of the austerian Austrian school like von Hayek and von Mises. I would include later conservative economists of the post-Friedman era at the University of Chicago, for example Robert Lucas, and freshwater types in general, however much they may deny (sometimes quite well on technical grounds) their Austrian core thinking. WRT Milton Friedman himself, he believed government should expand the money supply when needed, so he would actually be in a middle position now, possibly agreeing with Brad DeLong. What Friedman opposed was direct government investment through spending.

Brad gives a great example of Austrian nonsense in his post. My comment was this:

I suspect there are fundamentally different models of ethics at work here. Hard money, not surprisingly, appeals to people with the strict-father kind of philosophy. The end game of this pattern of behaviors is replication, essentially, making the world in one's own image, rooting out those who are different (sinners). For of course, one's own image is the only correct one. Only through great toil and suffering is happiness achieved. That hard work and suffering, of course, is the work whose byproduct is the replication of one's own self, and also endless accumulation of wealth for enabling the power that replication requires. Other people may see this as tyranny, fascism, imperialism, etc, and would just as soon be left to their own vices.

The other model is something like utilitarianism. The goal here is the greatest sum of human happiness, aka utility. Within the realm of economics, this appears as greatest amount of income, which follows the greatest amount of spending, since one person's income is by necessity another person's spending. Things that arbitrarily slow down spending, like hard money, are counterproductive. In this model, it is saving just for it's own sake (rather than for the purpose of funding future consumption, or managing future risk) which is the greatest vice. The ethics of economic acts might well be computed by determining their effect on the velocity of money, or more generally, value. Giving has the highest virtue in this regards, followed by spending, followed by financial investments, followed by bank deposits, to ultimately the greatest vice of all: hoarding assets that someone else might have a better use for. Why, that's goldbuggery--not surprisingly it's totally anti-social. By hoarding gold, and therefore keeping the price of gold high, we are inhibiting those who actually make useful things from gold. But stuffing bank notes into a mattress is also a way of destroying demand, which is also bad when demand is in shortage.

Demand, by the way, is constantly reduced by profit. Capitalist supply does not produce its own demand, it produces it's own demand less the saved part of profit, as Marx correctly pointed out. Therefore it only follows that as long as there is profit, and some of it is saved rather than spent, there are going to be problems keeping demand high enough.

Friday, July 13, 2012

Actually, there are many angles on this. For example, in an efficient market, saving only benefits the saver.

But I think at bottom in most people's thinking there is this idea of conserving, of saving in the truest sense. Conserving might be not opening that extra packet of sugar today, or using less energy by turning off the lights when leaving a room. Such conserving, or not using, makes things available for oneself and/or others in the future.

OK, now, compare this with the choice you make when you choose to spend or not spend. What is the impact?

Spending does not necessarily increase the consumption of natural resources over time. There are many ways in which spending today could either have negligible effect on resources, or even a positive benefit over time. That is determined by what one is spending on. And there are many other beneficial aspects that spending can have, such as on education.

Since it could be one way or the other, I think it's useful to consider what happens if spending has absolutely no direct impact on natural resources, merely a very small effect (such as spending on somthing like music or art), or, best of all, a positive impact on society. In any of these cases, spending also increases the level of income in the entire society. Most people would consider that a good thing. Along with the level of income, the level of employment increases, the level of poverty decreases, etc.

What does, in this case, not spending do? Not spending simply does nothing. So if there is a positive benefit to society from a certain spending, and it is NOT done, that is an opportunity lost.

Seems to me the more moral thing to do is to spend as much as possible on things having negligible or positive impact on natural resources over time.

Not spending is less moral.

The only case where this might not be true is if the not-spending for today itself has some moral purpose in the expectation of moral spending tomorrow. So, and so far as I know this is a standard view even among economists, the function of saving SHOULD be to enable future consumption, because that is how they understand utility.

However, in the real world, people get utility from things like status, and they can feel security from a stockpile, like a collection of bottled water or soup.

If there is risk, it may not be a bad idea to have some kind of stockpile. If there is risk of not having enough money, a stockpile of money might be a good idea. But one should see this as a personal hedge, not something of overall benefit to society. If it were a stockpile of canned goods, over time they would go bad, representing a waste of natural resources. In a relative sense, unnecessary saving does that also. It is a net loss to the possible utility achievable by society.

But the accumulation of not-spending merely for the purpose of self aggrandizement? That is immoral because all of that not-spending takes away from the potential income in the rest of society.

So it is liess moral not to spend, at least on particular kinds of spending described above, unless one has a reason not to based on future consumption needs or reasonable risk expectations.

This seems to be the reverse of how most people think of this.

What about saving defined as putting money in a savings institution? Generally, as far as making investment possible, etc., this actually has negligible effect on anything. If, for example, a bank needed more reserves it could borrow them. Banks can operate just fine without deposits. Your deposit slightly reduces the cost of money to a bank, that is all. That usually means that now the bank can have slightly higher profit. It is that extra profit, plus all the money the bank pays its employees, that represent the benefit to society from your deposit.

That is actually a very small amount of extra income in the rest of society compared to just spending the money all right now. The only possibility of a greater benefit to society is if you leave your money in the bank for a very long time, long enough that the extra profit exceeds the amount of your deposit. I suspect that would take decades.

And along with that, there is an additional issue regarding who gets the money you are spending. If you are paying a musician, for example, you may be paying someone with lower income than the beneficiaries of higher profits (and employee spending) in a bank. So your spending may have more positive distributional effects, as well as higher multiplier effects.

So once again, the more moral choice is to spend rather than to put money in a saving institution even. And you can imagine the same reasoning, pretty much, applies to other financial instruments. I believe it does, or moreso.

A very differerent kind of investment isn't making a claim on a future revenue stream, but directly spending money on some future productive capacity. The most common way people do that is by spending on eductation. That kind of spending is real and undeniably virtuous, but only clearcut as being investment or spending in the certain cases. A similar thing would be spending more money on a replacement furnace to get one that is more efficient. People do these things, most often thinking of them more as spending than investment, and the payback may be uncertain.

Is there something you can do that is even more moral than spending? Certainly it would seem to me, one raised as a Christian, that the answer would be giving. Cast your bread upon the water, Jesus commanded. (That did not mean you should cast your bread in exchange for gold, or AAA securities.) And it is, with one qualification.

When for example you are spending for the time of a musician, you are getting something. That something could be a benefit to someone else if your money were a gift. The musician could correspondingly give his time to some honorable cause, or he could make more money. Thus, more income. Thus when you give, you are creating more potential income than when you spend.

The exception would be if whatever personal resource the musician does not use for you, is NOT used by anyone else either, and of no particular use to the musician either (say for example, if he doesn't need more unclaimed time for rest, or doesn't need it much). Quite often musicians gain non-materially from performing, so not performing for you may be a loss to them as well as a loss for you.

So sometimes a gift is best (overall for society) returned as a favor, and sometimes not. But in a world with limited personal resources, not to mention natural resources, it would follow that the gift is nearly always the best overall for society.

So Jesus was right. Social welfare is maximized the most by giving without any demand or expectation of return.

*****

Part of the problem here is that people often think of money (or other wealth) as a resource. It is not a resource. It is a claim on resources. One's having it takes away from others. Best put in motion, therefore, and the faster away from oneself the better.

Thursday, July 12, 2012

It sounds to me that there are sufficient problems with the PD&HS not to take it too seriously. In this arena, as with nuclear power, I feel John is letting the pro-bigs off too easily with something that merely sounds like engineering. I certainly wouldn’t go out of my way to avoid local food simply because by some strained and incomplete calculations—and under certain special circumstances—it might involve more CO2 emissions. Under the condition that local and remote energy use were the same, and the in-country transport the same (likely favors local in central USA), the ship travel CO2 is additive, not necessarily large, but still additive. Long distance travel by ship also involves the construction and maintenance of ships, ports, etc.

OTOH, there probably isn’t that big a deal, with regard to the transportation costs, of buying imported food, and I’d love the idea of eating free range hormone and antibiotic free imported meats when and if I could not get them locally (and prepared locally…that’s the hangup for me, I don’t spend time to prepare big meals for myself, so I end up eating only what others prepare at nearby restaurants).

But this is so not the only issue. One of the issues often mentioned is food security. If all my food needs to be imported 5,000 miles from countries that in the future mine may not have good relations with, among other possible scenarios in which long distrance trade can break down, that’s one reason to prefer locality.

Another issue is that of economic development and regress. If we let other countries do all the farming, we lose our ability to do so, which might be useful in the future.

And a third is that, in principle, with more local food you may be able to ensure that what is being advertised is what you are getting. Adam Smith himself talks about this advantage in locality.

And a fourth is the one of injecting money into a local economy rather than a distant one. One argument could be that there is no greater altruism (and perhaps less) in supporting someone locally than distant. But this suffers from the problem #3 that we don’t really know who and what is involved. But here I might as well choose to consider self-interest. Injecting money in a local economy is more likely to be beneficial to me directly, reducing local unemployment, etc.

This is one of those areas where people would best do different things. Some people buy local while others buy distant. We shouldn’t be trying to turn economies into monocultures. That’s risky and unwise.

But that appears to be exactly what PD&HS don’t want. They seem to want you just to go along with what the buyer at your local supermarket chooses—typically on the basis of highest profit for the store. Their increased profit may come from reducing other money available in the local economy.

Well of course there are a lot of presumptions here that some of my friends won't agree with. Some might not agree that monetary or fiscal expansion would even address the problem. That was the point made, finally, in comments 243 and 244. I have a response to those posts. They merely assert that monetary or fiscal expansion will not create new jobs, that it will create inflation, and that inflation will hurt poor and young people the most. They provide no evidence or even argument for this. This sounds plausible if you don't think about it, so they hope you won't.

Rather than refuting their claim in detail, I suggest you read on for an entirely different way of looking at the problem.

And I have a lot of other thoughts on Randy's post. But what struck me as most important is this one, something I've been thinking about for the last year or two actually.

Most friends of mine do not actually fear inflation, as such. Inflation is defined as a rise in prices. One of those prices is the price of labor, or conversely wage income. Not only would most of my friends not fear that, they would greatly desire it. What they fear is the cost of goods, mainly, and services they consume, which is not (in the case of any of my friends) the cost of employing someone.

Now some people have small business, or own or operate large businesses and identify with the interests of the owners, who do fear the price of labor very directly. They would like to see that stay low, or even get lower. And, it turns out, that people who identify with the interests of capital like that have quite a bit of political power nowadays. But they would not like to see the price of the good or service they sell do that, as with wages for workers, they would love to see their product or service sell in as much volume (or more, of course) as it currently does but at an even higher price, if it could. Mostly, they would like to see their profit be the highest (and interesting that Profit does not appear in inflation) but their product or service price is a pretty good proxy.

It is my feeling that utility is most greatly served by serving first the needs of the workers. Therefore I will choose to look at things that way also. What workers are really worried about is not properly called inflation. I would call it Affordability, and define it as the price of goods and services used by a consumer, divided by the income of that consumer.

This could be somewhat captured by taking an inflation index and dividing it by the median wage. To be complete, the median wage should also be scaled by the employment participation ratio.